MOSCOW/MARIUPOL, Ukraine, Aug 31 (Reuters) - Ukraine and Russia swapped soldiers who had entered each other's territory near the battlefield in eastern Ukraine, where Kiev says Moscow's forces have come to the aid of pro-Russian insurgents advancing for an assault on a major port.

Ukrainian troops and local residents were reinforcing the port of Mariupol on Sunday, the next big city in the path of pro-Russian fighters who pushed back government forces along the Azov Sea this past week in an offensive on a new front.

The new rebel advance has drawn increasing concern from Ukraine's Western allies, who say its success is a result of reinforcement by armoured columns of Russian troops.

European Union leaders agreed on Saturday to draw up new economic sanctions against Moscow, a move hailed by the United States, which is planning tighter sanctions of its own and wants to act jointly with Europe.

Some residents of Mariupol have taken to the streets to show support for the Ukrainian government as the pro-Russian forces gain ground. Many others have fled from the prospect of an all-out assault on the city of nearly 500,000 people.

"We are proud to be from this city and we are ready to defend it from the occupiers," said Alexandra, 28, a post office clerk wearing a ribbon in blue and yellow Ukrainian colours.

"We will dig trenches. We will throw petrol bombs at them, the occupiers," she said. "I believe our army and our (volunteer) battalions will protect us."

Ihor, 42, and his wife Lena, 40, were packing their car to flee with their five-year-old daughter. They had sheltered in Mariupol after battle came to their home city Donetsk in July.

"We will not wait for another repetition of war. We did nothing to provoke it and we do not want to be a part of it," said Lena.

TROOP SWAP

The swap of soldiers overnight at the frontier was a rare gesture to ease tension, but Kiev and Moscow have given starkly opposing accounts of how their troops came to be on each other's territory.

A Russian paratroop commander said an unspecified number of Russian paratroops were swapped for 63 Ukrainian soldiers. A Ukrainian military source said the Russian soldiers numbered 15.

Kiev and its allies in Europe and the United States say the new rebel offensive has been backed by armoured columns of more than 1,000 Russian troops fighting openly to support the insurgents. The rebels themselves say thousands of Russian troops have fought on their behalf while "on leave".

Moscow denies its troops are fighting in Ukraine and says a small party of its soldiers crossed the border by accident.

Russian Major-General Alexei Ragozin said the paratroops had been handed back after "very difficult" negotiations.

"I consider it unacceptable that our servicemen were detained by the Ukrainian side for so many days. Our lads are upset about everything that happened. They will all receive the necessary psychological and other kinds of help. The lads will all be OK."

Ragozin said Russia, by contrast, had promptly returned hundreds of Ukrainian soldiers who at various times have crossed the border when squeezed by rebel forces. He said the latest group of 63 had entered Russia on Wednesday.

Kiev has in the past said some of its soldiers crossed into Russia to escape from fighting on the Ukrainian side of the frontier, behaviour that contrasts with that of the Russians it says crossed the border to wage war in Ukraine. Ukraine's military spokesman has mocked the idea that the Russians had "got lost like Little Red Riding Hood in the forest".

SANCTIONS

The United States and European Union have gradually tightened economic sanctions against Russia, first imposed after Moscow annexed Ukraine's Crimea peninsula in March following the ousting of Kiev's pro-Russian president by protesters.

So far, however, the measures have done little to deter President Vladimir Putin, who has referred to southern and eastern Ukraine as "New Russia".

On Sunday, Russian news agencies quoted Putin as saying it was up to Kiev to halt the fighting, and accusing the West of contradicting democratic values by supporting Kiev's military action against the rebels. Russia could not stand aside while people were shot at point-blank, Itar-Tass quoted him as saying.

Putin gave a typically defiant public appearance on Friday in which he described Russians and Ukrainians as "practically one people" and compared Kiev's attempts to recapture rebellious cities with the Nazi invasion of the Soviet Union. Russia is a nuclear power that will defend its interests, and foreigners should understand that "it's best not to mess with us", he said.

Moscow has responded to sanctions by banning the import of most Western foodstuffs, stripping French cheese and Polish apples from store shelves and shutting down McDonalds restaurants. The moves reinforce a sense among Russians that they are isolated from a hostile world, as in Cold War days.

Agreeing the Western sanctions has been tricky, not least because the 28-member European Union must take decisions by consensus and many of its countries depend on Russian energy resources.

Nevertheless, the EU has gone further than many had predicted, agreeing to impose sanctions on Russia's financial and oil industries last month after a Malaysian airliner was shot down over rebel territory, killing nearly 300 people, most of them Dutch.

EU leaders agreed on Saturday to ask the executive European Commission to draw up more sanctions measures, which could be adopted in coming days after review.

The White House praised the move to "show strong support for Ukraine's sovereignty and territorial integrity". But in a sign of the difficulty in achieving an EU consensus, the leader of tiny Slovakia threatened to veto any sanctions that damaged his country's national interest. (Additional reporting by Richard Balmforth in Kiev and Katya Golubkova in Moscow; Writing by Peter Graff; Editing by Mark Heinrich)

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